Navigating Household Worker Employer Tax Breaks Related to COVID-19
If your clients employ household workers from nannies to senior caregivers, you should know what tax benefits are available to them in recent legislation related to COVID-19.
Recent legislation in response to the COVID-19 pandemic including the Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES) has implications for your clients who have hired household help and the employees – nannies, in-home senior caregivers, housekeepers, and others – who work in their homes.
Here is what you, your clients and their workers need to know to take advantage of tax breaks, paid sick and family leave and expanded unemployment benefits.
FFCRA Paid Leave Benefits
The FFCRA was the first big federal legislation to address the COVID-19 pandemic. It took effect on April 1 and provides paid sick and family leave under certain circumstances related to COVID-19. FFCRA applies to employers with fewer than 500 employees so that obviously includes your clients with household help.
The Family and Medical Leave Act (FMLA), which typically does not apply to small employers is now in effect for anyone with fewer than 500 workers. FFCRA requires household employers to provide 80 hours of paid sick leave to their employees and up to 12 weeks of family leave – two weeks unpaid and 10 weeks paid – for employees affected by COVID-19.
Employees must have been working for on or after April 1 in order to receive benefits and can take paid leave through the end of 2020.
Qualifying reasons for paid leave under FFCRA include:
- Subject to a Federal, State, or local quarantine or isolation order related to COVID-19;
- Has been advised by a health care provider to self-quarantine related to COVID-19;
- Experiencing COVID-19 symptoms and is seeking a medical diagnosis;
- Caring for an individual subject to an order described in (1) or self-quarantine as described in (2);
- Caring for a child whose school or place of care is closed (or childcare provider is unavailable) for reasons related to COVID-19; or
- Experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury
When an employee is sick, quarantined, or isolated (reasons 1-3) they can take paid leave at their full rate of pay at a maximum of $511/day ($5,110 over 10 days).
If they are taking leave to care for someone sick, quarantined, or isolated (reason four), they can be paid at two-thirds their regular rate of pay at a maximum of $200/day ($2,000 over 10 days). For paid leave to take care of a child (reason five) and/or paid family leave under the expansion of FMLA, employees can be paid at two-thirds of their regular rate of pay at a maximum of $200/day (or $12,000 total over 12 weeks).
An employee’s regular rate of pay is their normal hourly rate. Overtime rates are not factored for FFCRA paid leave. Part-time employees are eligible for leave based on the number of hours they work on average over a two-week period.
Your clients can pay up to 80 hours in qualified sick leave over a two-week period even if an employee works more than 40 hours in a given week. For paid family leave, your client would pay for all hours their employee normally works in a week at two-thirds their regular rate of pay.
FFCRA Tax Credits
That is all the benefits for employees. Now, what about the tax credits for your client?
Paid leave is a dollar-for-dollar tax credit. Whatever your client pays their employee for paid sick or family leave can be reduced from their employer taxes paid to the IRS. Your client can pay above and beyond the maximums allowed in paid sick and family leave, but they will only receive credit on compensation up to those caps.
The taxes withheld from an employee include federal income taxes and FICA taxes (Social Security and Medicare). Your client is also remitting their share of FICA taxes. From the total tax amount that normally would be remitted to the IRS, deduct the amount paid to an employee for sick and family leave.
You can continue to submit Form 1040-ES with your client’s quarterly employer taxes for the amount they are remitting (total obligation less the funds taken for paid leave). Money taken for FFCRA tax credits will be reconciled when you file Schedule H with your client’s personal tax return.
Expanded Unemployment Benefits
The CARES Act provides federal funding to expand the availability of unemployment insurance to individuals who are out of work because of the COVID-19 pandemic. With this new law, virtually all types of workers, even those who otherwise would not qualify for unemployment benefits, may receive payments for up to 39 weeks of unemployment under certain circumstances. It also provides an additional $600 per week to all individuals receiving benefits for weeks of unemployment ending before July 31, 2020.
You and your clients should become familiar with the expanded benefits and advise any of their employees who have been laid off or furloughed who may qualify for benefits to apply through the labor agency of the state in which they were employed. Your client will be notified that their employee has filed for unemployment and should reply to any correspondence from their state labor agency.
If a client has been paying “off the books” or is behind on their taxes and their employee files for unemployment, then your client may face fines and penalties and be required to pay back taxes.
Individuals can apply for pandemic unemployment assistance if they are:
- Symptomatic, seeking a diagnosis, have been diagnosed or caring for a family member who has been diagnosed with COVID-19
- Caring for a child who is unable to attend school or another facility that is closed as a direct result of the COVID-19 pandemic
- Under a quarantine or advised by a health professional to self-quarantine
- Scheduled to commence employment but does not have a job or is unable to reach the job as a direct result of COVID-19
- Now their household’s breadwinner/major support because the head of the household died as a direct result of COVID-19
- Quitting their job as a direct result of COVID–19
- Out of work because their place of employment is closed as a direct result of COVID-19
An individual may be ineligible if they are able to telework or receiving paid leave benefits like FFCRA, workers’ compensation, disability insurance or any state-mandated sick or family leave.
Anyone eligible for unemployment through their state can receive the additional $600/week under pandemic unemployment compensation. This applies for weeks of unemployment ending on or before July 31, 2020. Pandemic unemployment compensation is considered taxable income by the IRS and state tax agencies.
Advising Your Clients
If a client’s household employee can’t work because they are sick or caring for someone who is sick from COVID-19 they can use:
- Employer-provided paid sick leave and PTO
- State-mandated paid sick and family leave
- FFCRA paid sick and family leave (required to provide if an employee qualifies)
- Disability insurance (only applicable in California, Hawaii, New Jersey, New York, Rhode Island)
- Unemployment benefits
If the employee is not eligible for paid sick leave, reducing their hours and filing for partial unemployment could be an option. Again, an employee needs to be paid legally to take advantage of paid sick and family leave and jobless benefits.
Household workers are joining the millions of Americans filing for unemployment, so this is a critical time for your clients to be up to date with household employment tax obligations. With the delayed 2019 tax filing deadline (and Q1 2020 deadline), there is time to help a client catch up on household employment taxes before filing or submitting an amended return with Schedule H.
The financial risk of being exposed as non-compliant is far greater than the costs of catching up on back taxes. This is an unsettled and challenging time for you and your clients. I hope these insights and guidance bring clarity about household employment, give you confidence, and help you make smart decisions for your clients.
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Guy Maddalone has more than 30 years of experience in the payroll, human resource, and employment services industries. In 1991, he founded GTM Payroll Services to provide payroll, tax, compliance, and insurance administration for families that hired a nanny or other household employees. Guy...